3 Ways to Finance a Continuing Care Retirement Community

While selling stocks and bonds may cover a CCRC entry fee, that may have significant capital gains tax implications, especially if there will be an eventual home sale, too. To avoid that, there are bridge financing alternatives that may be available for homeowners. Let’s take a look at three common approaches.

1.  Home Equity Line of Credit (HELOC)
I advise most clients who own a home to apply for a HELOC. It can be an excellent option for financing their future CCRC and it can serve as an emergency line of credit in the meantime. The basic idea is: instead of selling your home, securities or assets to generate the CCRC entry fee, which may leave you without a home for a period of time or generate capital gains taxes, you use your HELOC to make the payment to the CCRC. Then, once you have moved into the CCRC, you can sell your home and pay off and close the HELOC. Doing this in an expeditious manner typically keeps interest costs relatively low.

The size of a HELOC is largely based on a banking lender’s review of the equity accumulated in your home, your loan to value ratio, your debt to income ratio and your credit score. Once in place, a HELOC will remain open for a term of 10 years (unless you decide to close it sooner), at which point, if there is no debt, the HELOC will terminate. When this occurs, I suggest applying for a new HELOC to re-establish a new line of credit. If there is debt on the HELOC, then the debt will be converted to a fully amortizing loan that requires repayment of both principal and interest in monthly installments. 

HELOCs can also be invaluable to provide short-term bridge financing options for unexpected expenses–a new car purchase, home repair, or medical emergency. I have clients who used a portion of their HELOC to assist their children with down-payments on their homes. As their kids repaid them with interest, they repaid their HELOC. It was a simple, straightforward process and they avoided using their personal assets in a time of need. Keep in mind that if you do utilize your HELOC, interest will accrue. The interest rate is an adjustable rate based on the prime rate plus or minus a certain percentage set by the lender.

To qualify for a HELOC, you must:

• Own a home (does not necessarily have to be your primary residence). An appraisal of the house may be required, as determined by the lender.
• Pay a minimal application fee, if applicable (not all banks charge a fee and if they do, the fee is usually only a few hundred dollars, though it varies).
• Be approved through an application process where the bank reviews the value of your home, bank and brokerage statements, tax returns, other existing debt, credit history and assets owned overall.

2.  Margin Loan
Another way to gain access to significant capital without selling your assets or home is through a margin loan on your investment portfolio. Typically, if your investment accounts are enabled with margin capabilities, you can borrow up to 50 percent of the value of your investment portfolio. In other words, you can borrow from yourself, using your securities as collateral. Similar to the HELOC, a margin loan offers immediate access to funds–which you could use to pay that entry fee into a CCRC–and can subsequently be paid off upon the sale of your home. It’s important to note that there is still risk; if the security prices go down and you borrow too much on margin, there could be a margin call.

While a margin loan gives you the flexibility to create your own payback schedule, keep in mind that you will be paying interest on it, so it’s important that the interest rate is manageable for you. Margin interest rates are variable and partially contingent on the size and term of your loan. It is generally most cost-effective to get a margin loan at a time when the prevailing interest rate is low.² I recommend you speak with members of your Wealth Architects advisory team for more information.

To qualify for a margin loan, you must:

• Own at least one of the following typically eligible securities³: Equities or ETFs trading over $3/share; mutual funds held for at least 30 days; and/or treasury, corporate, municipal, or government agency bonds
• Enable the margins feature when you open your investment account–a simple box check that’s easy to miss if you don’t know to look for it. Our team can help you with this.
• Maintain a minimum level of equity in your account (per your brokerage firm) to avoid margin calls.⁴ 
• Satisfy additional qualifications that your custodian may require.

3.  A combination of the above
Let’s say you have a HELOC in place but it is only enough to cover a portion of the CCRC entry fee. In that scenario, it may make sense to consider utilizing a margin loan to cover the rest. Or perhaps you have both a HELOC and margin loan and you were granted more than you need to cover your CCRC. In that instance, your Wealth Architects advisory team can help you determine the most favorable distribution strategy to cover the cost of the CCRC entry fee based on your individual financial planning goals and current interest rates.

While a HELOC is usually the first option I suggest to a client, I also encourage them to keep the margin loan option available so they have both resources at their fingertips.

A backup option: Home Equity Conversion Mortgage (HECM)
A home equity conversion mortgage is a U.S. Department of Housing and Urban Development (HUD) program that allows homeowners to tap the equity in their homes without the need to sell their homes. HECMs offer homeowners aged 62+ a line of credit with a growth rate commensurate with the increasing value of their home. While HELOCs are fixed, HECM lines of credit can grow over time with no interest or principal payments required. HELOCs can expire or be frozen but HECMs are good for your lifetime; however, they often come with a very large upfront cost (e.g. upwards of $20,000). There are many nuances to this option and it’s often not the right fit for our clients, but for some it has been an effective method to help fund a CCRC purchase. For those who may need additional support and are considering a HECM, I’d urge you to read more about it here and speak with your advisory team and a specialist in this space.

Start with a conversation
When you’re ready to move into a nice retirement community, you deserve a smooth transition without a panicked race to sell the house or liquidate the stock portfolio. I love hearing from clients and their children about the peace of mind they have knowing that things are taken care of and they have a financial transition plan in place.

We recommend a HELOC and enabling margin capability on investment accounts to nearly all of our clients at Wealth Architects because, even if they are not about to enter a CCRC, these options come with low-cost emergency funds they can quickly tap into. It’s important to acknowledge, however, that everyone’s circumstances are different and there are so many nuances to these decisions. There might be other options that are more suited to you. Setting up a conversation with your advisory team can help you develop a thorough understanding of your situation and arrive at a financial plan that is truly tailored to you.

¹ https://www.unionbank.com/personal/financial-insights/investing/retirement/cost-of-continuing-care-retirement-communities-what-you-should-know
² https://www.investopedia.com/ask/answers/126.asp
³ https://www.fidelity.com/trading/margin-loans/how-it-works#
⁴ https://www.fidelity.com/trading/margin-loans/how-it-works#

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